How Much Should I Pay For This House?

The (MPO) Maximum Profitable Offer is calculated by first determining what the house will be worth after renovation – the ARV (After Repaired Value); less the rehab dollars required; less the Buy/Sell/Hold (B/S/H) costs; less profit for the rehabber less the Assignment Fee (your profit as a wholesaler). Note: If you plan to rehab the house yourself, just delete the Assignment Fee from the formula.

MPO = ARV – Rehab – B/S/H – Investor Profit – Assignment Fee

So let’s break that down a little further. To determine the ARV, study comparable sales data. Comparable sales are those properties which sold in the last 6 months to 1 year, and within ½ to 1 mile from the subject house – the more recent the comps and the closer to the subject property the better. But other factors must be considered as well. The more characteristics between the properties that are similar, the more valid the data.

Make sure that the house itself is similar in square footage, bedrooms and baths, age, style, and architecture. Don’t worry about condition except as it will affect the amount of rehab dollars required. Next, look at the neighborhood and the individual street. Do they look the same? Or is the comparable property on a beautiful street while the subject property is on a street riddled with empty littered lots and boarded up houses? The point is to view the potential investment as your end homeowner occupant will. If they could buy your completed investment on the bad street, or a house on the beautiful street – either for $150,000 – which would they choose? The other house of course. Which means your house is not worth the same – it must sell for less to attract a buyer.

Rehab dollars differ from renovator to renovator depending whether they do the work themselves, or use cheap subs, or use an expensive general contractor. The scope of the work should be the same – it is whatever is required to make the investment look like the comparable houses (unless the plan is to sell well under market value). I do not attempt to obtain all of the various contractor bids when I am making offers. All the real deals would be sold before I’d ever have an offer together! Instead I’ve developed ranges of rehab dollars based on the overall condition of the home. Is it an exact science? No, but neither are the bids – there will always be something missed. So why not work with a guide that is probably 90% accurate and allows for quick offers?

Buy/Sell/Hold costs include expenses such as appraisals, attorney fees, title search & title insurance, loan origination fees, debt service, utilities, insurance, taxes, real estate commissions, and closing fees paid on behalf of the end buyer. Again, these costs vary depending on each investor’s individual situation. In the Atlanta area, 15% of the ARV seems to be a good average allocation for B/S/H costs. If you are the renovator, calculate your specific B/S/H costs, then utilize that percentage for future offers.

Investor Profit is the amount you should leave in the deal for the investor buyer to make the deal attractive. Obviously the higher the better. In this current market the minimum is $25,000 and work up based on cost of the house and scope of rehab.

Assignment Fee is your profit in the deal. Don’t short yourself. You should use between $8-10,000 otherwise the deals won’t be worth it to you.

That’s it. That’s how you calculate the most you’ll pay for a property. But that’s not what you SHOULD pay. It is the maximum you’ll pay. It is the deal-breaker. You will not pay one penny over the MPO. Your negotiations should lead you as far below the MPO as possible. The difference in amounts is additional profit in your pocket. What you SHOULD pay is the minimum price below the MPO that the seller will accept.

Use this formula to make offers and you’ll never pay too much.

Expect abundance,

Lou Castillo